Thursday, May 1, 2008

why all the fuss over dividends?

Why do I get so excited about income from investments? In a recent post I explained that we are currently taking in $5.18 per day in the form of dividends and distributions from investments in our non-registered portfolio. If I ever ran this little fact past the average person, they would likely think I'm nuts for thinking this financial tidbit was even worth mentioning. $5.18 is less than one hour's pay for the clumsiest burger flipper on the supper shift. It's just about enough to cover a Venti Vanilla Bean Skinny Latte (a favourite of mine). So why all the fuss?

Well, the actual amount of money is really secondary to why I get excited about income from investments, and why I cheer for ours to grow month after month. Here are some of the reasons why I believe income from investments in the form of dividends (or re-earned income) is important, and why I really get behind our income from investments graph:
  • They're Passive! That's right, I don't have to get up early, I don't have to check my inbox, I don't even have to attend any meetings. I get paid simply because I am allowing my money to be at risk. My money sits patiently at the whim of the fickle and hyperactive stock market. As a fellow middle class guy once said, I get paid while I'm sleeping.
  • They Grows Like Nobody's Business Ok, it is somebody's business, but they are a heck of a lot more generous with raises than my employer is. Many companies have grown their dividend payments at rates north of 10% annually for decades. Examples of these would be Johnson & Johnson (JNJ), Bank of Nova Scotia (BNS), and McDonalds (MCD)
  • They're Human Dividends are tangible, and give us long term investors a warm and fuzzy feeling. Dividends affect our psychology as investors in a healthy way, they're also relatively permanent, and they're not 'paper gains'.
  • They Sneer at The Government of Canada A resident of British Columbia earning $50,000/ year pays only 4.4% tax on Canadian dividends. In Ontario they would pay 8%.

Sometimes it's easy to be shortsighted and jaded when it comes to money. Passive income, especially when it comes from dividends, is one of the best things going. It can not be compared to employment income. Why not plant the oak tree seed early so that you can enjoy the shade it provides as the years get on.

This post was inspired by Re-Earned Income by Mr.Cheap, from Quest for Four Pillars.


Lyndon said...

Ok now that you are recovering from your Bday this is my first question, homework for you MG-
1. I want you to compare your methodology ie Dividend Growth and DRIPING vs Passive/index/Etf investing eg XIU and DRIPING the quarterly distribution.I firmly believe in the compounding effect of dividends, especially in the tenth year when the slope turns up sharply, however the events of the last year make me wonder-eg
1. Look at Citigroup-look at the loss of capital, and this was a BLUE chip.
2. The currency issue ie Canadian gain would have wiped out any dividend growth etc, making me wonder if one should only stick to Canadian Dividend growers.
3. Tha Canadian marketplace is VERY narrow for this approach, I tried to mimic XDV and diversify and bought some stocks primarily for YIELD ie Torstar, however in Canada we dont have JNJs and GEs of the world, so one is only buying for the yield and to diversify as opposed to being keen on the future business prospects.
4. Witholding tax on US stocks effects the compounding machine.
4. Paying tax yearly on your dividends, albeit very favourably constitute a "tax " drag.
5. Do you believe in investing in other markets besides North America, ie Europe, Far East, Emerging Mkts, if so at what point in your investing career would you make that transition?
6. Potash, RIM, base metals, energy etc have driven the canadian market, they would not have been included in any Dividend portfolio, leading to significant underperfomance, I wonder if a blended approach is best so you dont miss the upside from " Growth".
I currently have subsituted the 30% fixed income in my portfolio with the Dividend Growth/yield approach on the assumption that given my time horizon bonds will not make me money on a after tax/after inflation basis.These are some of my random thoughts
Thx or your input.

Middle Class Millionaire said...

Couldn't agree more. I think people often overlook the favourable tax treatment that dividends receive. It's not what you make but what you take home that's important.

pitz said...

Personally I find it quite amazing that you can literally buy so many good stocks, dividend paying and not, for almost nothing these days, and certainly at a far lower cost than borrowed money. Borrow at 2.5% (after-tax), and buy the TSX yielding almost 6% (after-tax), and reap at least a 3.5% profit without even so much as lifting a finger.

Why is this happening? Because stocks have been the 'out of favour' asset class this decade, as people chased the housing bubble.

What's even more amazing is the plethora of stocks you can find these days that will even yield enough to make the interest payments just on the dividends alone, nevermind the re-invested capital.

While most of our friends will probably be paying mortgages on their consumption assets (houses, boats, cars, etc.) for the rest of their lives, we're building up solid assets that will, in time, provide complete freedom from debt servitude and interest. A little bit of consumption foregone when young, leads to the ability to consume much more when old.

MG said...

lyndon, a lot to chew on there. Those comparisons would be worthwile, i'll post about my performance vs. benchmarks like these in the future.

I believe in investing in U.S. stocks for several reasons. Check my post on 'x border shopping' for my rationale. As far as RIM, Potash, etc. - that is the way things go....dividend growth investing has never been about short term gains like this. There will always be hot tech firms, and commodity pushes, I'd rather opt. for consistency and dividend growth for long term appreciation.

MG said...

pitz, your comment here had me doing some thinking and I really think you are correct.

Dividend Growth Investor said...


Dividend Growth Investing significanlty underperformed the rise of the Nasdaq Composite in the late 1990's only to outperform it significantly over the past 7-8 years. What you want from a long -terim investing standpoint is to find a strategy that over time will yield positive returns. If you were starting a business, you wouldn't be expecting to become super rich overnight, would you?
If you own a diversified mix of stocks across a variety ot countries, industries etc, you should do just fine.

Btw MG, i will add this article to my weekly reviews.

cannon_fodder said...

My plan is to invest in Canadian dividend stocks in my non-registered portfolio and then balance with international dividend paying stocks in my RRSP. My goal is to have an overall balanced portfolio that eliminates the burdensome tax treatment for non-Canadian equities if held outside an RRSP.

Natural Personal Finance said...

I love this overview! Great work. I am also jealous of the tax advantages you Canadians enjoy on your dividends :>

tracyho said...

I invested in some blue chips stock ,

Annually I am looking forward for the dividens pay out better than putting in bank !

Thanks for you challenging post ,

Tracy Ho